A 1% increase in pricing strategy yields an average 11% increase in profit

From Harvard Business Review
Statistic in SaaS & Tech Growth Strategy

What’s the fastest way to profitably sell more of whatever it is your company sells? I argue that it’s better pricing. Think about how your company sets prices: Are you confident that your prices capture the value of your products and services? When I ask managers this question, most respond with a chagrined: “Not very confident.”

There are three reasons why “better pricing” should be your company’s top priority. First, if your company is not setting the right prices, there are hidden profits waiting to be tapped. Second, small changes in price can lead to big profits. McKinsey & Co. studied the Global 1200 and found that if they raised prices by just 1% — and demand remains constant — profits would go up on average by 11%, for instance. How much will a 1% price increase boost your profits? Finally and best of all, in many industries prices can literally be changed on Sunday night and start generating more profits on Monday morning.

So how can you start improving pricing at your company? Follow the 4 Cs — Confidence, Compensation, Choice, and C-Level.

Instill Confidence in Your Front Line. Most sales forces don’t sell in a manner that yields the most profit. Relationships, of course, are important. But to garner the highest price, your sales force needs to confidently articulate why your product offers the highest value compared to rivals. To be clear, “value” doesn’t mean lowest price. Instead, it is the offering that provides the best “deal” (most benefits for the price) for clients. It’s surprising, but most companies fail at this most basic task — they cannot articulate the value of their products and services. Can you?

If your product is better, let customers know how. You have to do more than say “ours is better” — this line is so commonly used that customers tune out. Go the extra step to quantify how being better translates into more profit. For example, a client recently quantified the millions of dollars it annually saves retailers by being better — through reducing product returns — and prospective customers responded with excitement.

Don’t worry if your product isn’t as good as the competition. After all, if customers only purchased the best, we’d all be driving Rolls Royce cars. Price can usually compensate for shortcomings. It’s okay to acknowledge that your product has fewer bells and whistles compared to its rivals. But then use price to seal the deal by asking, “Are all of the rival’s extra features worth the 25% premium they are charging?”

The bottom line: if your product is better than the competition, demonstrate it and charge more than rivals based on value. Conversely, if your product has fewer features, acknowledge it and justify a lower price.

Use Compensation to Align Your Sales Force’s Interests with Profit. Most sales forces are compensated based on the revenue they bring in. While this metric seals deals, it provides little incentive to fight for the highest prices. Remember, your company’s profits come from the last few dollars of a price. Setting a $95 price for a product that costs $90 to manufacture may be an easy sale that leads to a $5 profit. But if pushing harder leads to a $100 price, profits increase by 100% ($10 instead of $5). Transaction profitability should be a key component of sales force compensation.

Increase Profits by Offering Choices. One of the most effective pricing strategies involves offering good, better, and best product versions. Gourmet chefs often have early-bird, regular, and chef’s table options, for instance. I’ve found that customers appreciate being offered pricing options instead of just one “take it or leave it” price. This strategy allows customers to choose how much to pay and it’s often surprising how many people select the “best” (and most profit-laden) version.

Reap Results by Involving the C-Level. As we all know, driving change in an organization is difficult. While the changes that I’ve advocated are straightforward, they can’t be implemented unless they are reinforced by the C-Level of an organization. It is crucial for the C-Level to constantly tout the importance of and create a culture focused on pricing for profit and growth. Just as important, setting aggressive profit targets for managers with P&L responsibilities — who otherwise might not be interested in pricing — provides an extra incentive for them to focus on pricing as a means to reach their goals.

Employing the 4 Cs creates a foundation to boost profits and growth through better pricing. This will generate short term profits, but just as important, instills a core competency that helps to ensure the “right prices” in the future as the market environment evolves and new products are introduced.

So what do you think? Are you confident the prices your sales force currently charges capture the value of your products and services? Do you think that implementing the 4 Cs will drive sales and boost profits?

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